After the disasters, can we revive a free trade agreement with Japan?

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Luke Nottage receives funding, for research related to this comment, from the Australia-Japan Foundation which is part of the Department of Foreign Affairs and Trade, for the project on "Fostering a Common Culture in Cross-Border Dispute Resolution: Australia, Japan and the Asia-Pacific".

Prime Minister Julia Gillard was one of the first world leaders to visit Japan after the nation was stricken on 3 March by the earthquake-tsunami-radiation triple disaster.

But the Australian government was tactful and realistic in not placing high priority on progressing bilateral free trade agreement (FTA) negotiations. Talks had resumed in Tokyo over 7-10 February after stalling for almost a year, but a lack of progress – particularly over agricultural market access – had then prompted respective trade ministers to call for a high-level political summit to regain momentum.

The “3-11” disaster generated more urgent priorities for the Japanese government. Indeed, reversing a commitment to decide this question by the end June, in May the administration of Prime Minister Naoto Kan announced it would defer any decision about whether to join with the nine nations (including Australia) now negotiating an expanded Trans-Pacific Partnership (TPP) agreement.

Nonetheless, Japan has some significant incentives to resume FTA negotiations with Australia in the wake of 3-11, although the road ahead still looks rocky.

Fuelling Japan’s recovery

The ongoing problems afflicting the Fukushima nuclear power plant north of Tokyo, devastated by the tsunami, have resulted in the precautionary closure of the Hamaoka plant to the east, as well as delays in resuming operations at other plants while extra “stress tests” are carried out. This means that only 19 of Japan’s 54 reactors are now working, leading to nation-wide efforts to limit electricity consumption and adverse effects on the economy and everyday life.

Japanese power companies are already major buyers of liquified natural gas (LNG) and other natural resources in Australia, often also taking equity stakes in mining developments. Australian producers are already expanding production capacity in LNG, responding to indications that Japan would need to boost imports as enthusiasm wanes for nuclear power.

Concluding a bilateral FTA may well help improve energy resource security for Japan, especially as countries like China, Korea and now India increasingly vie for Australian resources, with Australia already negotiating bilateral FTAs with all three of those nations.

Agriculture hurdles

However, liberalisation of agricultural-market access remains a large stumbling block. Theoretically, the devastation unleashed by the 3-11 tsunami on agricultural capacity in five predominantly rural prefectures could create a unique opportunity to allow in more Australian imports over the short term, and even foreign direct investment over the long term.

Even accelerating and expanding the policy of direct payments to farmers, in exchange for selling off their most inefficient operations, runs up against the added budgetary stress on the Japanese government arising from the 3-11 disaster. That stress is now further exacerbated by the persistent uncertainties in post-GFC global financial markets created by high levels of national debt found also now in parts of Europe, as well as the US.

Temporary shortages of foodstuffs after the tsunami have also revived old arguments about the need for greater “food security’ in Japan.

Yet, as University of New South Wales academic Aurelia George Mulgan points out, there are some signs of hope – at least over the longer term – for FTA initiatives involving Japan and Australia:

"The revival of the regional food industry (interlinking agricultural production, processing and distribution stages) will need the input of technology and funds from the industrial sector, which may contribute to the industrialisation of agriculture in that area and engender greater cooperation between the agricultural and industrial sectors rather than conflict (as in the case of the debate over the TPP),” she writes.

Other factors may reinforce a shift in the usual dynamics of FTA discussions involving agricultural market access to Japan. Concerns have often been expressed in Japan – by consumers, not just farmers and their political or bureaucratic supporters – about “food safety” of imported goods.

Ironically, however, it is locally-produced goods and (arguably inadequate) safety regulations which are now being called into question – by recent reports of irradiated beef from Tohoku getting into the domestic market. If I were in Japan, as I will be with my family over October-November, I would be limiting my consumption to imported beef – as well as to several other products from Australia, including even our green tea (which is particularly susceptible to excess radiation, according to random testing of food supplies being systematically carried out in Japan).

The Australian government should work tactfully but vigorously to re-emphasise the safety of its agricultural exports, like it did in the wake of Japan’s “mad cow disease” outbreak in 2001. It can also highlight that Japanese firms have recently invested in major Australian food companies. To further appeal to Japanese consumer interests, and indeed Australian consumers who are also increasingly concerned about product safety issues, both governments should add mechanisms in their proposed FTA that require and facilitate product risk information-sharing.

Wheels already in motion

More generally, the shadow cast by the existing TPP negotiations may galvanise Japan to conclude first a bilateral FTA with Australia. The US is reportedly pushing strongly for a very liberal expanded TPP agreement, bringing in Japan. Yet, in practice, regional agreements often end up preserving liberalisation measures (such as tariff rates) similar to those agreed in bilateral deals.

On the other hand, a resumption of more active FTA negotiations at any level will depend also on political leadership in Japan. The Japanese government became active in concluding FTAs from 2001, coinciding not just with the collapse of multilateral WTO Round negotiations, but also with initiatives taken by then-Prime Minister Junichiro Koizumi to centralise decision-making and reduce scope for veto-players such as the Ministry of Agriculture.

Unfortunately, support for Prime Minister Kan has dropped significantly in recent months (after a brief uptick after 3-11). Indeed, he has promised to step down soon after enactment of some further legislation related to disaster relief. More generally, Australian National University academic Kent Anderson suggests that people in Japan may be increasingly viewing this year’s problems as now more of a regional problem – one that does not imply radical rethinking and institutional change on the scale of the transformations occasioned by the 9-11 disaster in the US. From that perspective, it may end up more like “business as usual” for Japan’s FTA negotiations after all.

Australian policy shift

A final complication is that Australia’s policy on FTA negotiations seemingly shifted anyway in April, with the announcement of the “Gillard Government Trade Policy Statement”. The statement is a curious mixture of political and (over-simplified) economic rhetoric.

Essentially, it blames the Howard government for over-indulging in bilateral and regional FTAs, with limited economic gain – in other words, with smaller partner economies or geopolitical objectives (presumably, in particular, AUSFTA). The statement attempts to regain the high ground by urging greater efforts to achieve multilateral trade and investment liberalisation, drawing partly on a Productivity Commission report last year on FTA economics and policy recommendations, but also arguing that this sounder economic approach was a focus – along with unilateral liberalisation and deregulation – of the Hawke/Keating governments.

This, therefore, seems to be appealing to the “free marketeers”, especially within the Australian business community, and it raises the question of whether the Gillard Government anyway will want to press strongly for an FTA even with a very large economy such as Japan.

Even if it does, another stumbling block in negotiations arises from the statement’s views on investor-state arbitration (ISA). On one interpretation, the Gillard Government wishes to eschew completely the incorporation of such protections for foreign investors in all future treaties, even with developing countries.

A more contextual interpretation would still only allow ISA to be included on much more restrictive conditions than in previous FTAs or investment treaties concluded by Australia. Yet ISA protections are found in almost all of Japan’s treaties, and in the February talks DFAT itself reports that: “Progress on the investment chapter was slower, as key areas of difference remain, including Japan’s priority request to include an Investor-State Dispute Settlement mechanism.”

I suspect that after 3-11, Japan may agree to exclude or sharply limit ISA protections if Australia presses the point, as seems likely especially now that Australia has been subjected to its first-ever arbitration claim (under its treaty with Hong Kong, brought by the subsidiary of an international tobacco company).

More careful drafting of ISA provisions is sensible anyway. But many TPP partners (especially the US, also keen on ISA) will be concerned about that sort of outcome. And Australia’s stance will certainly slow down the Australia-Japan FTA negotiations. Potential Australian investors into Japan, including now perhaps Jetstar, may also well come to regret the omission of conventional ISA protections in such treaties.

Find out more at a Sydney Law School 3 August seminar on “Australia’s new policy on investor-state dispute resolution”.

This comment draws on research for the project, “Fostering a Common Culture in Cross-Border Dispute Resolution: Australia, Japan and the Asia-Pacific”, supported by the Commonwealth through the Australia-Japan Foundation which is part of the Department of Foreign Affairs and Trade.

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